Dr Philipp Paech specialises in the field of international
financial markets law and regulation (see more detailed research interests
below).

Before joining LSE in 2010 he worked for the
European Commission’s Financial Services Directorate since 2007. Previously,
from 2002 to 2006, he was member of the UNIDROIT Secretariate in Rome,
co-ordinating work on what is today the Geneva Securities Convention. During
these years he was also secretary of the EU Clearing and Settlement Legal
Certainty Group and Chairman of the G30 Clearing and Settlement Legal
Committee. Earlier work experience includes brief periods at the Association
of German Banks (2002) and the Boston Consulting Group (2001). Philipp holds
a doctorate from the University of Bonn (Germany) and obtained the Diploma
of EU Studies from the University of Toulouse (France).

Philipp is also a Research Fellow at the Institute for Law and Finance in
Frankfurt and was a Visiting Associate Professor at Tokyo University’s
Graduate School for Law and Politics.

Research Interests

Philipp's principal research interest is international financial markets law
and regulation and the close interaction with insolvency and general
civil/commercial law, covering adjacent aspects of private international
law. He has worked extensively on legal risk and inefficiencies of
cross-jurisdictional disposition of securities, and on cross-jurisdictional
exercise of investor rights. Additionally, Philipp advises on legal aspects
of the financial market infrastructure, covering institutions like central
securities depositories, central counterparties and securities settlement
systems. In the context of the recent financial crisis, he has focussed on
netting mechanisms and the resolution of financial institutions. His work
concentrates on the international legal and regulatory framework and on
European legislation.

External Activities

Current

Consultant expert for the European Central Bank (since
2010).

Past

Consultant expert for the Association for Financial
Markets in Europe, AFME (2013-2014)

Consultant expert for the European Commission
(2012-2013)

Member of the UK Government’s delegation to the
UNIDROIT Intergovernmental Conference on International Principles on
Close-out Netting. Rapporteur to the Intergovernmental Conference
(2011-2013).

Consultant expert for the European Parliament (2012 and
2013)

Qualified lawyer admitted to the bar of Frankfurt
(since 2006).

Member of the Local Capital Market Development Legal
and Regulatory Advisory Panel of the European Bank for Reconstruction
and Development (2011)

'Safe harbour' is shorthand for a bundle of
privileges in insolvency which are typically afforded to
financial institutions. They are remotely comparable to security
interests as they provide a financial institution with a
considerably better position as compared to other creditors
should one of its counterparties fail or become insolvent. Safe
harbours have been introduced widely and continue to be
introduced in financial markets. The common rationale for such
safe harbours is that the protection against the fallout of the
counterparty’s insolvency contributes to systemic stability, as
the feared ‘domino effect’ of insolvencies is not triggered from
the outset. However, safe harbours are also criticised for
accelerating contagion in the financial market in times of
crisis and making the market more risky. This paper submits that
the more important argument for the existence of safe harbours
is liquidity in the financial market. Safe harbour rules do away
with a number of legal concepts, notably those attached to
traditional security, and thereby allow for an exponentiation of
liquidity. Normative decisions of the legislator sanction safe
harbours as modern markets could not exist without these high
levels of liquidity. To the extent that safe harbours accelerate
contagion in terms of crisis, which in principle is a valid
argument, specific regulation is well suited to correct this
situation, whereas a repeal or significant restriction of the
safe harbours would be counterproductive.

Close-out netting is a risk mitigation tool used by financial institutions. It is comparable to set-off and its effects in insolvency are loosely comparable to a super-priority. Therefore, it might conflict with the pari passu principle. Many jurisdictions have solved that conflict and adapted their laws so that close-out netting is enforceable even in the event of insolvency. However, as the financial market is global, the parties, their branches and assets might be located in different jurisdictions. Nevertheless, countries failed to agree on a harmonised conflict-of-laws rule, despite the obvious need, when they decided not to include a conflict-of-laws principle in the 2013 Unidroit Principles on the operation of close-out netting provisions. The relevant EU law, though patchy, already addresses this concern. This article identifies the underlying conceptual difficulties and proposes a solution for an improved framework for both the EU and other financial marketplaces.

In its first part, the paper addresses issues relating to
close-out netting and bank insolvency. In many financial markets repurchase
agreements (repos) and securities lending agreements benefit from special
insolvency treatment which - broadly speaking - consists of an exemption
from a number of insolvency law mechanisms. There was some discussion
triggered by the Financial Stability Board’s Recommendation 13 on repos and
securities lending, aiming at changes of the special insolvency treatment of
these transactions. However, this analysis submits that no changes should be
made in this regard. Instead, the regulators should be given the power to
temporarily stay close-out netting, as in bank resolution proceedings. At
the same time, regulatory haircuts to collateral assets (FSB Recommendations
6 and 7) may buffer systemic consequences but are unable to act as a circuit
breaker. In its second part, the paper addresses legal uncertainty in
relation to proprietary interests in collateral securities. Repo and
securities lending collateral assets face increased enforcement difficulties
in cross-border settings, stemming from different national rules regarding
good-faith acquisition and close-out netting. Haircuts, as proposed by some
commentators, are not an appropriate solution. Instead, only harmonisation
of securities law and of the relevant insolvency rules can guarantee a
consistent cross-border framework.

‘Study on Directors’ Duties and Liability in Europe’ (2013), prepared for the
European Commission (with Carsten Gerner-Beuerle and Edmund-Philipp Schuster)

This comparative study analyses directors' duties and liabilities in all EU
Member States, identifying regulatory strategies and trends across Europe and
discussing enforcement strategies. The report has been prepared for the European
Commission.

Enforceability of Close-out Netting: Draft UNIDROIT Principles
to Set New International Benchmark, by Philipp Paech. (2013) 1 JIBFL 13,
Butterworths Journal of International Banking and Financial Law, January
2013, pp 13-19.

UNIDROIT has recently launched an intergovernmental process
intended to set an international non-binding standard for close-out netting
legislation. This paper, first, provides insights into the question of why
harmonisation is needed. The colossal exposures inherent in the derivatives,
securities lending, repo, forex and similar markets are generally covered by
close-out netting provisions, which are contained in the relevant master
agreements. Close-out netting reduces mutual exposure by about 80–90%. The
‘net’ exposure is taken as a basis for the calculation of collateral and
underlying capital, thus being vital for market participants' risk
management, as well as for prudential supervision. Even though most
developed markets have adopted netting-friendly legislation, the
international nature of the modern financial market complicates
enforceability of close-out netting in cross-jurisdictional situations, in
particular in insolvency scenarios. Further, the Article explains the
current difficulties in transposing the concept of close-out netting across
jurisdictional borders and advocates a functional approach alongside the
five criteria (immediate discharge of obligations? obligations due?
obligations of the same kind?). Lastly, it sheds light on the concepts
underlying the current UNIDROIT draft principles.

'Market Needs as Paradigm: Breaking Up the Thinking on EU
Securities Law' by Philipp Paech. Law Society and Economy Working Paper
Series, WPS 11-2012 October 2012 (forthcoming in Thévenoz, Conac and Segna,
Intermediated Securities, Cambridge University Press, early 2013).

Modern patterns for holding investment securities face three
basic legal challenges: first, negotiability and the possibility of good faith
acquisition must be ensured as they are the basis of today’s anonymous trading
and settlement of securities. In the past, securities have been incorporated in
paper certificates to achieve this result, allowing for the application of
principles of property law to what in substance is a set of mutual rights and
obligations. Second, account holders need to be protected against intermediary
risk. Traditionally, concepts like safekeeping or trust were applied to achieve
this result. Since there is a need to adjust to modern, basically electronic
holding of securities, these concepts are now stretched to a considerable
extent. Third, 40% of holdings entail cross-jurisdictional questions. Therefore,
the issues of both negotiability/good faith acquisition and protection against
intermediary risk need to be addressed from an international perspective. Modern
conflict-of-laws concepts, in particular PRIMA, lead to the application of
different laws to the 'same' securities, with potentially differing legal
analyses in respect of these securities. The EU legislator was so far unable to
address these problems. The Geneva Securities Convention and the Hague
Securities Convention provide for answers but face criticism and are not yet
implemented.

This paper sets out eight principles designed to ensure the
cross-jurisdictional enforceability of close out-netting. Close-out netting is
heavily used by the financial industry and used in many regulatory mechanisms
like in particular bank’s capital requirements (Basel II). However, as soon as
banks located in different jurisdictions agree to apply close-out netting
between them, they risk that the relevant provisions are unenforceable in the
event of insolvency of either of them. About 40 countries do allow close-out
netting, however on differing terms. The Principles shall provide guidelines to
legislators on how to amend national insolvency laws so as to be compatible with
each other. Principle 1 defines close out netting. Principles 2 and 3 set a
standard regarding the circle of netting-eligible parties and netting-eligible
financial transactions. Principles 4-6 deal with formal requirements, promoting
in particular the idea that unenforceability as a consequence of non-compliance
with formal requirements is not the right means to achieve regulatory goals.
Principle 7 is the core rule and defines the relationship between close-out
netting and insolvency avoidance rules. Principle 8 clarifies the role of
Principle 7 in respect of bank resolution procedures as recently promoted by the
Financial Stability Board. Each Principle is accompanied by a detailed
commentary explaining its background and reasoning. The paper is the final one
in a sequence of four that the Author has produced for UNIDROIT. It has greatly
benefited from the input of other Members of the UNIDROIT Study Group and will
serve as a basis for intergovernmental negotiations.

The Geneva Securities Convention was adopted in October 2009 with a view to
creating an international framework for the alignment of the laws governing
securities holding and disposition. Its 48 Articles follow an extremely
complex architecture designed to accommodate the need for rights over
securities which are robust in case of insolvency of intermediaries while at
the same time being neutral in respect of different legal concepts in place
around the globe. Dr Paech was one of the main contributors to the
Convention and is the initial author of the commentary accompanying the
definitions of intermediated securities, securities account,
intermediary, securities clearing system, securities settlement system
,and the relevant commentary on articles relating to central banks and
regulated intermediaries, transparent systems (excluded functions),
prohibition of upper-tier attachment, insolvency of system operator or
participant.

Cross-border issues of securities law: European efforts to
support securities markets with a coherent legal framework (Briefing for the
ECON Committee of the European Parliament)

This study was commissioned by the European Parliament as a
briefing paper for its Committee on Economic and Monetary Affairs (ECON), in
view of the Commission’s preparatory work on securities law. The study
attempts to break down this highly complex area to the origins of the legal
uncertainties surrounding intermediated securities. It explains the tensions
of legal concepts stemming from the fact that securities in their substance
are obligations but as a legal concept are treated as chattel in most
jurisdictions. Further complication results from the internationalisation of
the financial market, where securities are transferred, pledged and lent
across jurisdictional borders. The fact that they are legally treated like
movables leads to confusing results of the conflict-of-laws analysis,
following which more than one law might influence the securities’ legal
status. The paper compares the various legal models that are applied to
securities holding and explains which aims would need to be achieved by the
law in order to make cross-jurisdictional holdings legally sound.

'The need for an international instrument on the enforceability of close-out
netting in general and in the context of bank resolution' UNIDROIT 2011 Study
78C – Doc. 2.

Close-out netting is typically applied to transactions such
as derivatives, repurchase and securities lending agreements, and other
kinds of transaction that tend to carry a high counterparty and/or market
risk. Regulatory authorities strongly encourage the use of such close-out
netting provisions (alongside collateral) because of their beneficial
effects on the stability of the financial system. The reason is that
referring market participants’ claims in the event of default of the
counterparty to regular insolvency proceedings on a gross basis instead of
on a net basis might expose the non-defaulting party to levels of credit
risk and market risk that are difficult to calculate and manage for the
relevant types of contract due to rapid changes in market values and
uncertainty regarding the risk of repudiation of contracts during the
proceeding. However, these beneficial effects can be particularly felt in
the event of the insolvency of a party. In that case, the use of close-out
netting assumes that the legal effects stipulated to that end by the parties
(the close-out netting provision) will be recognised by and be enforceable
under the applicable insolvency law. However, the current situation is that,
even if about 40 jurisdictions recognise netting in insolvency, the extent
to which they do so and the scope and legal effects of close-out netting
provisions differ significantly. Furthermore, some jurisdictions do not
clearly recognise netting, and the legal practice in such jurisdictions
often resorts to the principles governing set-off, failing to recognise the
fundamental differences between the two mechanisms. This patchwork is
unsatisfactory in cross-jurisdictional situations, since it exposes the
financial market participants’ risk management to unnecessary legal
uncertainty and may even jeopardise it. An additional aspect of the
enforceability of netting provisions has come to the fore since the
beginning of the recent financial crisis: regulatory authorities, while
underlining the usefulness of netting, have contemplated the need for a
brief stay on the netting mechanism in pre-insolvency or insolvency
situations affecting a financial institution, so as to allow the regulator
the time needed to decide if and how to resolve an ailing financial
institution in an orderly fashion so as to mitigate risks to financial
stability. The paper analysis the commercial and insolvency law issues
arising in relation to close out netting as well as the interplay with
regulatory rules. This paper is the first in a series of four paper which
the author produced for UNIDROIT.

A set of 19 Principles designed to capable of enhancing the cross-jurisdictional
enforceability of close-out netting provisions. The principles address different
issues of commercial and insolvency law as well as conflict of laws. The paper
is an Annex to and is build on the findings of the study (above) and serves as
basis for the work of the UNIDROIT Study Group.

The UK and Germany have introduced, in 2009 and 2010
respectively, special resolution regimes for banks. Amongst the various
tools like ‚bail in‘ and ‚bad bank‘ allowing regulators to wind up failing
banks also figures the power to stay contractual termination rights that the
non-defaulting party might otherwise exercise against the defaulting party.
However, the non-defaulting party might be located abroad. As a consequence,
the regulatory effect of such regulatory stay is questionable and the
consequences in terms of commercial and insolvency law remain widely
unclear. The paper therefore concludes that effective implementation of the
relevant regulatory powers requires simultaneous changes to the insolvency
and commercial law

'Systemic risk, regulatory powers and insolvency law – the need for an
international private law framework for netting', Institute for Law and
Finance Working Paper, Series No. 116, Frankfurt, March 2010

The financial crisis has shown that regulatory tools to either save or wind
up failing financial institutions are inadequate. As a consequence, the
Cross-Border Bank Resolution Group of the Basel Committee developed a
blueprint of the design of a future framework for bank resolution. Both
collateral and netting play a vital part in this framework as they are
directly connected to issues of solvency (under Basel II) and liquidity of
financial institutions. The CBRG proposes to change the framework for
close-out netting. The working paper analyses this proposal in the context
of insolvency law and securities law and concludes that certain of the
proposed measure risk being less effective than predicted as long as the
legal concept of close-out netting and its treatment in insolvency are
approached piece-meal on a global scale. It is the initial paper of a series
of works that ultimately leads to a proposal for global close-out netting
principles (cf. above).

Solutions to legal barriers related to post-trading within the EU (Second
Advice of the EU Clearing and Settlement Legal Certainty Group - LCG),
Brussels, August 2008 (co-authored as part of professional assignments)

'Interconnecting Law of Securities Holding and Transfer', Journal of
International Banking and Financial Law, 1/2007, p. 9-15, with K. Löber.

To increase the efficiency of both local and cross-border
transfers and collateral transactions, today the vast quantity of securities
are being held, transferred and pledged by entries to securities accounts
with intermediaries (eg banks, brokers, clearing and settlement systems,
etc), rather than in physical form by the investors or directly with the
issuers. Unfortunately, more often than not choice-of-law and substantive
law rules continue to reflect assumptions that securities were held,
transferred and pledged by physical delivery and were supposedly mainly
purely domestic transactions.